In early November, President Trump and House Republicans took the next step in implementing tax reform.
They released the Tax Cuts and Jobs Act which provides specific details and aligns closely with the Unified Framework for Fixing Our Broken Tax Code (tax reform framework) issued in September. Many of the proposed changes, for businesses and individuals, match the campaign promises made by President Trump. For businesses, this includes a corporate tax rate reduction, new tax on pass-through entities and immediate expensing of capital investments. For individuals, this includes new and streamlined tax brackets, elimination of the estate tax and increases in the standard deduction. According to the administration, the changes are designed to make the tax system less complex for businesses and easier to manage for individuals. To help clients, prospects and others understand the impact on their business and individual taxes, Hanson & Co has provided a summary of key changes below.
Key Business Tax Reform Changes
- Corporate Tax Rate – The legislation is proposing a permanent reduction of the corporate tax rate from 35% to 20%. The Trump Administration has argued that the United States has the fourth-highest tax rate on businesses in the world. According to the Tax Foundation, the mean average business tax rate for industrialized countries is 21.97%.
- 25% Pass-Through Tax – Under existing regulations, individuals who own a business are required to pay taxes on income earned by their business at the corresponding individual rate. However, the new pass-through entity tax (maximum of 25%) means that impacted business owners would no longer need to worry about their individual tax rate. There will be rules in place to specify what types of business can claim the rate to ensure the lower tax rate is not abused.
- Repatriation of Foreign Earnings – A key issue for many American businesses have been the tax expense of bringing foreign earnings back to the United States. To address this concern, the proposed legislation calls for repatriated earnings to be taxed at 12%.
- Expensing Capital Investments – Businesses will be allowed to fully expense the costs of capital assets such as equipment, machinery and other items in the year purchased. Under current regulations, short-lived capital investments must be expensed over a five-year or longer period to receive the full tax benefit. In addition, the legislation increases Section 179d amounts from $500,000 to $5M and the phaseout threshold from $2M to $20M. This change provides a significant increase in the tax benefits for making commercial energy-efficient improvements.
- 1031 Like-Kind Exchange – This often used method will be changed to limit the tax deferral on gains to real property only. All other exchange transactions would no longer be permitted.
Key Individual Tax Reform Changes
- Increases in Standard Deductions – There will be a significant increase (almost double) in the standard deduction available to both individual and married taxpayers. The new standard deduction will be $24,000 for married taxpayers filing jointly and $12,000 for single filers. The increase is part of the administration’s plan to reduce the complexity of filing and claiming various tax incentives.
- Reduction in Tax Brackets – There will be a reduction in the number of tax brackets for individuals from seven under current tax laws to three: a 12%, 25%, and 35% tax bracket. Single taxpayers who earn $45,000 and married taxpayers who earn $90,000 would be included in the 12% bracket. Single taxpayers who earn up to $200,000 and married taxpayers who earn up to $260,000 would be included in the 25% bracket. Finally, single taxpayers who earn up to $500,000 and married couples who earn $1M would be in the 35% tax bracket.
- Estate Tax Phase-Out – The threshold for the estate tax would double from $5.6M in 2018 to over $10M. The legislation would then phase out the tax over a six-year period.
- Elimination of Key Incentives – The legislation proposes an elimination of many familiar tax deductions and credits available to taxpayers. The more commonly claimed incentives slated for removal include the student loan interest deduction, medical expense deduction, moving deduction, hope scholarship credit, lifetime learning credit and alimony payment deduction. The charitable contribution deduction and home mortgage deduction will remain intact.
The changes outlined above reflect the significant changes coming as part of tax reform. While it’s unlikely the legislation will pass Congress without some changes, it does provide insight into what the tax landscape could look like in 2018 and beyond. If you have questions about how reform will impact your business or individual tax situation or need assistance with tax planning, Hanson & Co can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.